While debate about the impact of the coronavirus on the world economy and central bank policy has picked up, it’s probably too early to involve the SA Reserve Bank in such debates.
There’s more than a month to go before the monetary policy committee, which attracted a degree of criticism in January for doing exactly what segments of the analyst community had been calling for, decides on interest rates again. And there’ll be no shortage of local risks for it to chew on between now and then, not least the latest developments on Eskom and SAA, which may have put paid to any hope the government will come up with anything resembling a credible plan to reduce the fiscal drag from state-owned enterprises (SOEs).
Globally, the concern has been that the virus will close down large parts of the world’s second-largest economy. If workers in China can’t travel or shop for a prolonged period of time, the impact is likely to be disinflationary and growth inhibiting. That could point to even lower interest rates, though there is some debate about whether the world’s major central banks have already exhausted their ammunition after cutting spending over the past decade fighting the consequences of the global financial crisis.
In recent crises, the assumption has been that SA would feel the impact through a weaker currency and higher oil prices, which translate to elevated concern about inflation heading to the upper end of the 3%-6% inflation target. Then economists start debating potential policy tightening, or at least a step back from any thoughts of cutting rates.
Oil prices fell to the lowest in more than two years this month and are still down nearly 16% since the virus came to light on January 12. That would indicate that inflation risk this time would be to the downside. As always, the rand, which weakened beyond R15/$ to its weakest levels since November, could worry policymakers despite the benign inflation outlook.
The Federal Reserve, which has a dual inflation and employment mandate and has tended to be more proactive in responding to risks to the growth outlook, may provide some support for the rand. Despite a relatively robust economy, record low unemployment rates and a fairly benign inflation outlook, the Fed cut rates three times in 2019. Before another strong jobs report on Friday, traders were increasingly pricing in more easing this year.
That could help by preserving the yield advantage of holding assets denominated in local currency, though an argument can also be made that a prolonged slowdown that leads to lower US rates need not be a positive development for emerging-market currencies such as the rand because it could result in a renewed flight to safety while dimming demand for the commodities that we export.
While it does look like the conditions are primed for lower interest rates to provide some support for the economy as the global picture potentially darkens, policy and economic risks at home are worsening, with the government seemingly all at sea.
On Eskom, it has now been left to Cosatu to provide some leadership and a plan for dealing with its dire finances. Unfortunately, it is a plan that has the potential to bankrupt the country.
The plan, which at its heart has the use of workers’ pensions to provide financial relief for the utility, has many flaws. The most obvious one is that it is being sold as workers — mostly Cosatu members — providing a R250bn rescue for the utility. The not-so-small print reveals that it’s anything but because the state has the ultimate responsibility to meet the pension obligations.
Strangely, the government is said to be enthusiastic about a scheme that goes against its stated commitment to reducing the fiscal drag from SOEs.
Another baffling idea is swapping Eskom bonds — which for as long as there isn’t a default would provide an income to holders in the form of coupon payments — for “worker equity”.
Leave aside the question of whether workers actually carry this risk and are therefore entitled to this “equity” or the contradiction of a union that is steadfastly against privatisation proposing that its own members become shareholders while everybody else is prevented from doing the same.
Any lay person who has a small pension would be less than amused if they received a letter today advising them that from now on they would be forfeiting their guaranteed interest payments and would be compensated by receiving shares that are worth absolutely nothing in a bankrupt company.
In this case, this goes straight into the country’s books, adding overnight about R100bn to the contingent liabilities that we keep going on about as the biggest risk to SA’s economy.
And then there was the debacle with SAA over the weekend. Having decided it wasn’t willing to keep throwing money at the airline, the government found an easy and tidy way to ensure that someone else took on the responsibility, and the political heat, for the tough decisions it’s not willing to make itself.
Not to anybody’s great shock, when the business rescue practitioners, who are supposed to administer the airline and nurse it back to some operational future involving no more government funding, came up with an unpopular plan, the government decided it was going to try to overrule them without a thought about the legal consequences of doing so.
As last week’s headlines show, it is impossible to call how these will play out.
One thing for sure, it’ll be hard to convince anyone who’s observing — ratings companies or investors — that the government has a grip or that the state of the nation address and budget this month will provide directions.
In January, the Bank was able to ignore the outside noise and concentrate on its inflation forecasts. By March, it may not have that luxury.
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